UK awarded too much in renewable energy subsidies - NAO

LONDON

Two fishermen sit in their boat at the Gunfleet Sands Offshore Wind Farm near Clacton-on-Sea in southeast England May 16, 2014.

Reuters/Suzanne Plunkett

LONDON (Reuters) - Britain's energy ministry awarded too much in subsidies to eight renewable energy projects in April - 16.6 billion pounds in total - meaning that consumers will pay over the odds for the electricity the projects produce, a parliamentary watchdog said.

The report, by the National Audit Office (NAO), comes amid mounting pressure on politicians to try to keep energy bills down and a day after energy regulator Ofgem referred the country's retail energy market to the competition and authority (CMA) for investigation.

The subsidies - promised to five offshore wind farms and three biomass plants expected to start producing electricity between late 2015 and 2019 - are worth 16.6 billion pounds according to the NAO, and guarantee around 63 pounds per megawatt (MW) for the projects' electricity.

British wholesale power prices for 2016 currently have a value of around 50-55 pounds/MWh.

If all the projects, which include the involvement of British utility Drax and Danish utility Dong Energy [DOENRY.UL], achieve their expected maximum capacity they will add 4.5 gigawatts to Britain's electricity generation capacity by 2020, around 5 percent of the country's current total generation capacity.

However the cost amounted to 40 percent of the government's total budget for renewable subsidies, the NAO said.

"This decision may provide higher returns to contractors than needed to secure the investment and also limits the amount of remaining budget subject to competition in later rounds," the NAO report said.

The subsidies were awarded under Britain's new contracts-for-difference (CfD) scheme, designed to boost investment in new power plants in the country, particularly low carbon emission generation such as renewable power and nuclear plants.

The Department of Energy and Climate Change (DECC) defended its payments.

"The Government has been dealing with a legacy of underinvestment and neglect in our energy system, meaning we've needed to drive through reforms to secure investment in new generation to keep the lights on in the years and decades ahead," DECC said in response to the report.

DECC did not give precise figures on the total cost of the contracts but said in an April announcement the projects would provide up to 12 billion pounds of private sector investment and support 8,500 jobs.

Under European law Britain must ensure 15 percent of the energy it uses comes from renewable sources by 2020 and to meet this target DECC estimates that at least 30 per cent of British electricity needs to come from renewable sources by the end of the decade.

Last year the government awarded contracts under the scheme worth 16 billion pounds to EDF energy to help fund development of the Hinkley Point C nuclear project in southwest England.

The European Commission is currently considering whether the contracts for difference are compatible with EU state aid rules.